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The Economics Nobel Goes to Sargent & Sims: Attackers of the Phillips Curve

12 Oct

This morning when Thomas Sargent of New York University (along with Christopher Sims of Princeton) won the Nobel Prize in economics, it marked the lucky seventh time the Nobel has been given for work critical of the “Phillips curve.” The Phillips curve being one of the greatest of Keynesian warhorses. It’s a graph that was developed in the 1950s showing a trade-off between unemployment and inflation. When one goes up, the other goes down.

Readers of this column will recall that back in March I had occasion to marvel that six Nobels – if you’re counting, for Edmund Phelps, Edward Prescott, Robert A. Mundell, Robert E. Lucas, Milton Friedman, and F.A. Hayek – dating back to 1974 have been given for torching the Phillips curve. And then comes today’s citation for Sargent:

“In the early to mid-1970s, Sargent wrote a number of highly influential papers, where he showed how rational expectations implied a radical reinterpretation of empirical macroeconomic phenomena and rendered invalid conventional statistical tests of macroeconomic relations….Taken together, these papers had a profound impact on central hypotheses about the role of monetary policy and the Phillips-curve tradeoff. Compared to other researchers at the time, Sargent focused more on actual data and on ways to evaluate theory by taking active expectations formation into account. He was thus able to show why earlier tests had gone wrong and how new, more accurate, tests could be constructed.”

The citation goes on:

“[Sargent and his co-authors’] estimates suggest that the central bank was initially fooled by an incorrect belief about the Phillips curve, which led to a gradual increase in the inflation rate. But the sequence of shocks in the 1970s, along with a revision of the central bank’s beliefs, generated a subsequent fall in inflation.”

As citations go, it’s actually pretty coy. For the “incorrect belief about the Phillips curve” was that the curve was wholly inaccurate. But when you’ve given seven Nobels for the same thing, it’s time for some circumlocution.

The 1970s, when Sargent did the work that resulted in this prize, inflation and unemployment were together doing a mad tango where they kept scaling ever more dizzying heights. First there was the recession of 1969-1970, when unemployment and inflation were both at the moderate-to-high level of 6%. Then there was the double-dip recession of 1974-1975, when unemployment touched 9% and inflation 11%. Then there was the soul-crushing 1980-1982 experience, when inflation scratched 14% and unemployment 11%.

And then there were the beauteous Reagan-Clinton decades when inflation plunged to 3% and unemployment to 5%.

No wonder at one point in the citation, it dryly states that Sargeant proposed that the Phillips curve might be “vertical.”

This time, the Nobel committee is striving to say that this prize was given specifically for Sargent’s corrections to the initial criticisms of the Phillips curve. Not that the curve is cogent; it’s just that the initial remonstrations (for which all those other prizes were given) were not as penetrating as they could have been.

I ask friends in the sciences if Nobels are ever given for the same discovery made over and over again, if in different ways. They say of course not. Seems to be the same thing in literature and peace: uniqueness all around. But in economics, you have to repeat yourself to the point of folly.

Yet Sargent’s prize remains pertinent. Just last month, the president of the Chicago Federal Reserve, Charles Evans, strongly implied that the Fed should fight unemployment with a gusto worthy of the Phillips curve; the president’s former top economist, Christina Romer, has been extolling its virtues lately; and it very much seems to be part of Fed Chairman Ben Bernanke’s toolkit through the Quantitative Easings and Operation Twists.

In the Gospel of Christianity, it is asked, “How many times should I forgive my brother? Seven times?” Jesus’s response is no, “seventy times seven times.” If the Phillips curve is a sin (and you can bet it is), the structure of experience suggests that in the eons ahead of us, many dozens of prizes are yet to be awarded for meritorious service in striving to hack it down.


Obama’s Phony Fight For Housing

12 Oct

This story appears in the Oct. 24 edition of Forbes magazine.

For people who profess their desire to get the depressed housing market back on its feet the Obama Administration has been singularly inept. Despite numerous programs to allegedly help people keep their homes and prop up housing prices, the housing crisis continues, and home building is at a fraction of its levels before the bubble that began a little more than a decade ago. Here are things Washington would do if it were genuinely serious about alleviating this crisis:

• Order Fannie Mae and Freddie Mac to let homeowners whose equity is temporarily underwater refinance their mortgages as long as they have equity in their houses and are making their monthly payments. These folks are stuck with mortgages at rates of 5% and 6%. Since they have “skin in the game” and are servicing their mortgages, why not let them get the current lower rates? Obama professes to be the scourge of the rich, yet it’s high-income Americans who are reaping the most refinancing advantage from today’s minuscule mortgage interest rates.

• The Administration claims it wants to make it easier for repossessed or unoccupied houses to be turned into rentals. Good idea. But Fannie Mae and Freddie Mac both severely restrict the number of houses an entrepreneur can acquire for that purpose: ten at Fannie, four at Freddie. Remove the restrictions entirely. If someone is willing to risk capital to buy a lot of houses to rent out, by all means let them. It’s their money at stake, not the taxpayers’.

• Dust off an innovation used more than 20 years ago, when the real estate market in Texas and elsewhere collapsed during the savings-and-loan crisis: Let homeowners who can’t make their mortgage payments have the option—if they qualify—of signing a five-year lease on the house. Monthly payments would be lower, and there would also be less likelihood of abandoned houses depressing neighborhood property values. The lessees would have the option after five years of buying their houses at a discount or moving on.

• Drop the damaging lawsuits Fannie Mae and Freddie Mac filed against banks for alleged wrongdoing in underwriting packages of mortgages during the housing mania more than five years ago. This was less a crime than multitudinous stupidity. Let banks focus on the future instead of spending their efforts and capital on fighting government shakedowns. If banks are to be held criminally liable for what happened, then the biggest culprits of all—the easy-money Federal Reserve and the government-sanctioned monopolies, Fannie and Freddie—should be headed (pun intended) for the guillotine.

• At the same time urge the courts not to upend the settlement Bank of America made over allegedly questionable activities perpetrated by Countrywide Financial, the company it acquired in 2008. Some state attorneys general want a bigger payoff than the $8.5 billion BofA has offered. The Administration should tell them, as the Brits would put it, to “bugger off.” To mix metaphors, if the pols overmilk this BofA cow they could well flip its mortgage entities into bankruptcy, and the AGs would get far, far less than that $8.5 billion.

• Stop the Federal Housing Administration from guaranteeing mortgages with ultralow down payments and other questionable underwriting practices. The FHA is well on its way to joining Fannie Mae and Freddie Mac as a big financial disaster.

Economic Policy In The E.U.: More Bailouts, More Debt, More Crises

12 Oct

BRUSSELS—Belgium’s capital dates back to the sixth century, but today the modern dominates.  As the headquarters of the European Union, Brussels is filled with contemporary office buildings overflowing with meddlesome bureaucrats.  What began as a system of economic cooperation has turned into quasi-continental government.

But the so-called European Project risks collapse.  While establishment elites want more political integration, Europe’s financial crisis is turning its people inward.  So far the E.U.’s confused response to Greece’s fiscal crisis has exacerbated the continent’s long-term economic and political problems.

Proposals for European integration go back decades, even centuries.  After World War II pan-European cooperation was seen as the best way to reintegrate Germany.

However, the Eurocrats — a mix of politicians, academics, businessmen, bureaucrats, journalists, and others — wanted more.  The Common Market was turned into the European Union, with expanded powers.  Even that was not enough to transform the continent into a country, a Weltmacht which could act as a great power.  Complained French President Nicolas Sarkozy:  “Europe cannot be a dwarf in terms of defense and a giant in economic.”


A bit like the Israelites of old who asked God for a king to be like other nations, the Eurocrats demanded a president to be like America and China.  Explained Wilfried Martens, a Member of the European Parliament (MEP):  “the E.U. must be united and able to speak with one voice on the world stage.”

But the European people were far less enthused about the European Project.  In 2005 voters in the Netherlands and France rejected a new constitution to shift power from member nations to Brussels, reduce the requirement of unanimity for E.U. action, expand the authority of the European Parliament, and create an E.U. president and foreign minister.  The measure was repackaged as the Lisbon Treaty, which did not require popular approval, except in Ireland, where the constitution mandates that treaties be put to a vote.  Then the Irish said no, leading to a frenzied but successful effort to force a revote — with the “correct” result.

On Dec. 1, 2009 the Lisbon Treaty took effect.  Officials believed they finally had answered the derisive question asked by U.S. Secretary of State Henry Kissinger years ago: What is the phone number for Europe?

Now there’s a phone number.  In fact, there are several phone numbers.  But the 27-member E.U. is no closer to becoming a functioning country.

Baroness Catherine Ashton, the High Representative for Foreign Affairs, has made no policy of note and struggled with only indifferent success to establish her authority against other E.U. officials as well as member states.  The new E.U. diplomatic corps just adds more Europeans for other governments to talk to.

Herman van Rumpuy was chosen to be president of the European Council, but Jose Manuel Barroso remains president of the European Commission.  And member states continue to rotate as presidents of the Council of the European Union; Poland will hold the slot until year end, when Denmark will take charge.  No one outside of Europe treats this tri-headed bureaucratic curiosity seriously.

The 17-member eurozone is in even greater trouble.  The euro entered circulation in 2002, even though some supporters recognized the danger of instituting monetary union without fiscal union.  German Chancellor Helmut Kohl called the system “a castle in the air,” but he still agreed to give up the fabled Deutsch Mark.

In fact, the euro’s objective was as much political as economic — to drive European federalism.  Create the national currency and the nation will come.  That was the hope, anyway.  Gerhard Schroeder, Kohl’s successor, contended that Europeans eventually would have to abandon “some erroneous ideas of national sovereignty.”  Any problems could be solved by increasing political and economic integration and transferring more national powers to Brussels.

Now the entire E.U. is under siege, with the threat of financial crisis in several countries and spreading “contagion” which could take down banking systems and even national economies.  Greece appears headed for a default.   Ireland and Portugal also have received bailouts.

Spain’s economy is almost twice the size of the other three combined and the government suffers from a rapidly increasing debt load.  Moreover, noted theEconomist:  “Spain shared several of the smaller economies’ weaknesses, like a loss of competitiveness and big current-account deficits.”  Italy, with Europe’s fourth largest economy, recently had its credit rating downgraded by three levels.

The conventional wisdom in Europe is that the way to combat too much debt is to issue more debt.  The way to transform bad banks is to turn the European Central Bank into a bad bank.  The way to respond to opposition to more political integration is to impose more political integration.  Council President Van Rompuy summed up this approach:  “we’ll do more.”

European leaders recently agreed to double the European Financial Stability Facility, the EU’s bail-out fund.  Where is the money to come from?  Warned Gideon Rachman of the Financial Times, the bailouts “impose a financial strain on countries that fund the emergency loans but are themselves heavily indebted.”

In fact, many Europeans doubt the wisdom of turning the onetime continental free market into a debt and transfer union.  Slovakia’s government is having trouble rounding up the necessary votes for passage.  Malta has delayed its decision.  Finland earlier demanded that Athens provide collateral for any Finnish aid.

Moreover, while German Chancellor Angela Merkel won the necessary parliamentary consent, most Germans oppose the bailouts and a majority of Germans want to return to the D-Mark.  Bundestag member Frank Schaeffler, a member of the Free Democratic Party, Merkel’s coalition partner, has collected signatures from five percent of FDP members requiring a party referendum on the E.U.’s permanent bail-out mechanism.  The result would bind FDP parliamentarians and could threaten Merkel’s government.

With money goes control, so E.U. leaders want to assert greater authority over members’ fiscal as well as monetary policies.  For instance, Juan Manuel Barroso advocated a “single, coherent framework to deepen economic coordination and integration, in particular in the Euro area.”

Many Eurocrats see Eurobonds as a panacea.  Explained Barroso, “Once the euro area is fully equipped with the instruments necessary to ensure both integration and discipline, the issuance of joint debt will be seen as a natural and advantageous step for all.”  Advantageous for everyone but Germany, anyway, which would share its top credit rating with Greece, whose bonds trade as virtual junk.

European leaders continue to deny that Greece is likely to default.  But virtually everyone believes otherwise.  Michael Fuchs, the Merkel government’s deputy parliamentary floor leader, observed:  “Greece is bankrupt.  Probably there is no other way for us other than to accept at least a 50% forgiveness on its debt.”

Such a write-down would be painful for investors across the continent.  The cost would be particularly high for European — and especially German and French — banks, which hold much Greek debt.  Also threatened would be the ECB, supposedly the continent’s economic guarantor, which has been buying bonds from Greece and other over-extended member nations at face value.

Moreover, the ECB has been lending to weak banks to maintain their liquidity.  Concern over the stability of Europe’s banks led E.U. finance ministers to promise to recapitalize financial institutions, which means another bail-out financed by already heavily indebted states.

Today everything depends on unending German munificence.  Juliet Samuel ofCityAM noted that “Markets and European politicians are tying themselves in knots [attempting] to convert junk bonds into triple-A rated bonds. … Whatever the details, the aim is the same:  Brussels wants to underwrite Greek debt with German cash — all without letting the voters know.”  British Foreign Secretary William Hague was equally blunt, warning:  “Germans will have to accept that they are going to subsidize those countries for a long time, really for the rest of their lifetimes.”

To keep the money flowing European leaders have played upon German guilt persisting out of World War II.  However, Daniel Hannan, a British member of the European parliament, doubts this tactic will work on Germany’s young, whose formative experience was the fall of the Berlin Wall, not Adolf Hitler’s seizure of power.  At some point the German people are likely to say Nein! to subsidizing their more profligate European neighbors.

Moreover, while the Eurocrats may consider extending Brussels’ control over member states to be the only answer, doing so would require a new treaty, which would generate fierce and perhaps insurmountable opposition.  Germany’s constitutional court already has set limits to Berlin’s transfer of sovereign powers.  Moreover, Great Britain, which refused to join the eurozone, has resisted continental intrusions on its sovereignty.  The price demanded by London for its assent to any new treaty could be high:  Prime Minister David Cameron indicated the ongoing fiscal crisis may provide Britain “future opportunities” to repatriate some national powers back to London.

Earlier this year the majority of E.U. members said no to a German and French proposal for a “grand bargain” involving greater control by Brussels over deficits, pensions, retirement, and more.  Euroskeptic political parties have been gaining strength across Europe.  French economists Dagustin Landier and David Thermar argue that “voters opposed this big step towards federalism, and politicians know it.”

The obvious alternative is to let Greece default and restructure the Euro, either creating a two-tier currency, divided between strong and weak members, or dropping Greece and other heavily indebted states from the eurozone.  However, EU leaders worry that doing so would kill the larger European Project.  Warned Chancellor Merkel:  “If the euro fails it’s not just the currency that fails, but Europe and the idea of European unification.”  French President Sarkozy, said, “The euro is Europe, and Europe is 60 years of peace on our continent.”

The failure of the euro might be complicated and costly, but it would not plunge the continent into chaos.  Nevertheless, for dedicated Eurocrats failing to continue European integration would be almost as bad as war.  It would invalidate their main political agenda.

Europe is not alone in its economic distress.  Washington’s public finances are even worse in some ways. However, the E.U. remains a collection of nations rather than a nation, with continental government as distant as ever.  Instead of giving the E.U. more power, Europe’s leaders should start emptying those imposing buildings which fill Brussels.  Europe desperately needs more liberty, not more bureaucracy, and more growth, not more debt.

Higher Health Insurance Premiums This Year? Blame ObamaCare

12 Oct

Most Americans saw their insurance bills jump this year, according to a new study from the Kaiser Family Foundation. The average employer-based premium for a familyincreased a startling 9% in 2011. Over the next decade, rates are expected to double.

The Kaiser report is only the latest piece of research to indicate that ObamaCare isn’t driving down health care costs, as its proponents promised, but is instead accelerating their rise.

This year, the average premium for a family hit $15,073 — $1,303, or 9%, higher than the year before. And that’s on top of increases of 5% in 2009 and 3% in 2010.

Employees are picking up a substantial portion of that tab. They paid an average of $4,129 for their family insurance premiums this year — more than double what they shelled out 10 years ago. And that figure doesn’t include out-of-pocket health expenses.

These premium hikes have outpaced general inflation and salary increases — and thus are swallowing a greater share of American households’ budgets. A study published in the September 2011 issue of Health Affairs found that burgeoning health costs have decimated nearly an entire decade’s worth of income gains. In 2009, the average American family had just $95 more to spend at will than it did in 1999.

Worse, there’s no relief in sight. Next year, employers expect premiums to rise 7.2%, according to the National Business Group on Health.

Over the next ten years, American families can expect rising health costs to continue to offset pay raises. According to the Kaiser study, premiums are set to reach a whopping $32,175 by 2021. And more than 50% of employers have stated that they plan to shift a greater share of health-insurance costs onto their employees.

ObamaCare is to blame for much of these impending increases. Richard Foster, the Chief Actuary for the Centers for Medicare and Medicaid Services (CMS), reports that America will spend an additional $311 billion on health care in the next decade because of the law.

CMS estimates the growth in health insurance costs will increase 10 extra percentage points in 2014 because of ObamaCare — a 14% increase, versus 3.5% without the law.

In 2020, the net cost of health insurance is estimated to be $271 billion. Without ObamaCare, that number would have been $248.7 billion — a difference of more than $22 billion.

ObamaCare drives up the cost of insurance by piling mandates and required coverage benefits onto every single policy.

Consider the so-called “slacker mandate,” which requires all family policies to cover adult children until they turn 26. According to a recent federal report, nearly 1 million young adults gained health coverage this year thanks to the mandate.

Of course, adding them to their parents’ policies isn’t free.

Towers Watson found that the rise in young-adult enrollment was responsible for premium increases of as much as 3% at many firms.

Even the feds admit that the mandate means that families will pay more. According to HHS, each new dependent will tack on an additional $3,380 to their parents’ insurance costs this year. By 2013, extra dependents will add $3,690 to families’ annual insurance bills.

That cost impact is even more significant because most of those who seek coverage through their parents know that they’ll need care. This “adverse selection” issue results in a sicker — and thus costlier — overall insurance pool.

Or take the “essential benefits package” — the list of healthcare services that all policies must cover. Already, benefit mandates at the state level force up premiums by an average of 10.5%, according to Pacific Research Institute scholar Dr. Benjamin Zycher.

Slathering federal mandates on top of existing state mandates will drive costs even higher — and thereby make coverage unaffordable for more people. Massachusetts Institute of Technology economist Jonathan Gruber — a supporter and architect of ObamaCare — estimates that a 10% hike in the cost of the essential benefits package could increase the number of uninsured by 1.5 million.

There’s no way around it — ObamaCare isn’t saving anybody money. Americans should agitate for its full repeal and replacement– before they watch the cost of their health insurance consume yet another year’s worth of salary gains.

Sally C. Pipes is President, CEO, and Taube Fellow in Health Care Studies at the Pacific Research Institute. Her latest book is The Truth About ObamaCare (Regnery 2010).

Occupy Wall Street? America Needs An “OccuParty”

12 Oct

Ron Paul should go to Zucotti Park in New York and speak to the occupiers.  America needs an OccuParty, and Paul is just the guy — the only guy in the presidential race with the guts and the brains — to quicken the Occupy Movement and broaden it into a real political force to be reckoned with.  Conservatives who fear the movement are allowing the Wall-Street/Washington Establishment to use the Occupy Movement as a bogey to blind conservatives to their true interests and bind them to the establishment.

The occupiers are infuriated because they believe banks stole from them while Tea Partiers are outraged because they believe Big Government stole from them. They’re both right. The Fed rigged interest rates and big government rigged the rules to unhinge the subprime-mortgage, derivatives and credit-default-swaps markets, which the banks took full advantage of, and when the balloon went up they stuck out their hands for a Big Government bailout.

As one experience D.C. political operative who’s finally fed up with the situation told me when I suggested to him that Paul should go to Wall Street:

Big Government stole taxpayer dollars to bail out banks, which are now in possession of our stolen property. The Occupiers and the Tea Partiers should really disassociate from both political parties and work together to dissolve the crony relationship between Big Government and Big Business. End the Fed.

If Paul were to take his campaign for peace, liberty and prosperity on a tour of occupied parks across America (reportedly demonstrations were held in more than a dozen locations around the country this weekend, including Los Angeles, Richmond, Minneapolis and Indianapolis), he could pull together an OccuParty to take on the establishment Republocrat Party, which runs and is destroying the country before our very eyes.


The MoveOn Movement is a movement to nowhere and even worse, passé.  We’ve moved way beyond Bill Clinton’s sexual indiscretions to, well to nowhere. We need a new force in American Politics, a TakeOn Movement to take on an establishment that seeks to control every facet of life; take on the bureaucracy, which has replaced real democracy in America; and take on state capitalism — call it Fascialism — a malevolent military-industrial-financial complex masquerading as capitalism and killing America one unwarranted war and bailout at a time.

Paul’s support among all Americans, not just the over-polled, hard-core base of the Republican wing of the Republocrat Party, is difficult to know at this moment.  He can count at least a solid 15%, likely more.  Numerous national polls have him running close to or even ahead of Barack Obama in a head-to-head match up with the president alone.

In my opinion, Ron Paul’s strategy should be to double his base of support to 30%.  Then when the Republican wing of the Republocrat Party freezes him out of its privileged slot on the ballot, he will be positioned to pivot into a third-candidate run against both heads of the two-headed Republocrat beast of prey.

We are seeing the first blush of revolt against the establishment. By default, the Occupy Movement has become saturated with lefty sentiment to impugn capitalism and exonerate the welfare state.  The demands, to the extent they are formalized, are to restrict freedom further with heavy-handed government redistribution using growth-stunting, coercive political power rather than expanding freedom and allowing pro-growth market-based reallocation to destroy enclaves of political privilege and expand the pie for all.

Paul would probably be booed and heckled at Zucotti Park, no less than any first-time speaker in Hyde Park London experiences.  But, what else could one expect of an angry, frightened crowd that has been caught in the clutches of crony capitalism, abused by politicians, battered by bureaucrats and forced to bail out plutocrats?  What other response is conceivable from a people brainwashed in their schools to believe real capitalism is evil and that America practices anything close to real capitalism today.  Both premises are false.  Young people know in their hearts they are false, and they are thirsting for someone to lay out the truth for them who is untainted by the incestuous establishment and unconnected to the self-serving political duopoly.

There is no more powerful force in nature to dilute class distinctions and thus defuse class warfare than free markets; no force more potent than free-markets to call the government-bankster cartel to account for turning America’s financial system into a giant casino and protection racket — let them go broke.  There is no force more just and efficient than free markets to level the income distribution, humble the arrogant rich and depower the finaglers and manipulators who use politics to rig the system in their favor.  There is no force more effective than free markets to reallocate resources and redistribute wealth from the undeserving and unproductive, politically connected elites to the hardworking political nobodies who consume the real goods and services each other produce.

Heraclites said one can never step into the same river twice, which perfectly illustrates the dynamism and churning of true capitalism in operation as it beats down profit margins, replaces old firms with new and innovative operations, permits the poor to become affluent and displace the rich — what Joseph Schumpter called creative destruction.  Contrast this with the stagnant pond of Fascialism in which the rich and powerful soak at the expense of the masses whom they coerce into fetching and carrying for them like serfs on the Republocrat estate.

America’s problems and existential threats arise not from too much freedom or capitalism but from too little of both.  If Paul directs his campaign for peace, liberty, equality and prosperity to occupied America, his message will resonate with this growing movement of the disaffected.

It is said political leaders don’t organize a parade; they find one already formed up and ready to march and jump in front of it to lead with their own personal drum major’s baton.  Spontaneous mass movements are similar.  Leaders don’t create them but they stand at the ready, prepared to infuse the movement with their own ideology and advance their “solutions” as the remedy to whatever the problem happens to be that ignited the movement.

The Occupy Movement currently is glazed in emotion with a Leftist-lite patina because action in the street is the left’s milieu. Who better than neighborhood organizers and local unions, lefty activists and environmental extremists to spot spontaneous uprisings and commandeer them for their own ends?  It is, therefore, time for a leader like Paul who can bridge the left and the right to speak to the masses and take his peace-and-freedom message onto the streets and into parks of occupied America.

Politicians, bureaucrats, shyster lawyers, banksters and their cronies, not the occupiers, are the aggressors.  It is the political duopoly that is pressing down on, pushing against, squeezing and hammering on the masses, trying to exert total control over all human behavior and then inciting people to riot if they resist.  But the masses don’t need to riot.  Escape from the establishment, not attack upon it, is the objective.  Led carefully, the masses possess a singular unconquerable attribute — mass itself — which once in motion, makes it impossible for the establishment to prevent its escape.  And, once the serfs are off the estate, the masters will be paralyzed without slaves to do their bidding.

The Occupy Movement is alike yet it is also different from the Civil Rights Movement.  Civil disobedience is not the optimal weapon of defense against this establishment under these circumstances, at least not yet.  What the Occupy Movement can grow into under the leadership of someone like Ron Paul is an irresistible, passive-aggressive force of self-defense against the predator establishment.  It can become a peaceful but relentless, unabated forward movement by the masses to escape the establishment’s clutches.  If the masses are mobilized, the Republocrat Raptor will face a choice:  Resist and get crushed or let the people out of its clutches, fly away and return America to the people.

From “Spreading The Wealth” To “Spreading The Misery”

12 Oct

Misery loves company.  From the demonstrators on Wall Street, to the halls of Congress, that destructive but all too human impulse is rising to the fore.  The potential result – policies that spread the misery — now stand as a potential and potent threat to the economic outlook.

There is certainly more than enough misery to go around.  With the unemployment rate at 9.1%, and the 12-month change in the CPI at 3.77%, the “misery index,” the sum of the two, in August was 12.87, its highest level since May, 1983.  And, last week’s report that the unemployment rate remained stuck at 9.1% in September means economic misery remains high.

The fact is the growth in the U.S. economy and the consequent job creation remains anemic at best.  The September jobs report was good news only in the sense it provided some evidence that the U.S. economy was not slipping into another recession.  Nonfarm employment edged up by 103,000, reflecting in part the return of 45,000 Verizon workers who had been on strike in August.  Revisions to the July and August numbers also show an additional 99,000 jobs were created in those two months.  But, the three month average remains below 100,000 new jobs a month, far below the number needed to bring down the unemployment rate.

In addition, wage gains continue to lag the increase in the price level.  During the past year, consumer prices have increased 3.8%.  But average hourly earnings are up only 1.9%, and the average weekly earnings of production and nonsupervisory workers are up only 2.2%.  The net result: more than a 1.6 percentage point cut in real wages for the average American worker.

With little relief in sight, there are strong grounds for those most affected to take to the streets and demand change. The young, minorities, the disadvantaged and a huge slice of the middle class who were promised they would benefit from the massive increase in the government’s control over the economy are beginning to realize that they are, in fact, bearing the burden of those policies through unemployment, limited job opportunities, and falling living standards.  Worse, those who were supposedly going to pay are still doing just fine.

Adding to the resentment against those who have managed to prosper are the government bailouts of Wall Street firms, the politically connected, includingGeneral Electric, and the United Auto Workers, and, let’s not forget, the wasting of billions of dollars on “green jobs.” As it turns out, empowering government in the name of the greater good inevitably means empowering the special interests and the rich with political pull.

No wonder the chant of “tax the rich” has such appeal.

Faced with the stark failure of their policies to create jobs or to produce a “more just” society, progressives are replacing “spread the wealth” with “spreading the misery” as their polar star. Thus, President Barack Obama champions a so-called “jobs bill” calling for the very same policy mix that produced today’s high misery index. Targeted and temporary tax cuts and another massive increase in government spending are to be funded by permanent increases in tax rates on so-called millionaires and billionaires — those who make more than $200,000 a year.

This plan puts hope over experience.  If government spending could produce jobs, Greece would be a booming economy instead of the basket case of the Eurozone. For every dollar spent by government, a dollar has to be taken from the private sector. Only if it is at least as productive as the private sector can government spending lead to an increase in employment.  Otherwise, government spending reduces the resources of the economy by imposing involuntary, one-sided exchanges.   But, real jobs are created and society’s wealth is increased when individuals are free to discover exchanges that are mutually beneficial.

A permanent increase in marginal tax rates may spread the misery to those with higher incomes, but it will kill, not create jobs in the U.S. economy.  Personal income tax rates are the equivalent of a tariff on the employment of U.S. workers. The higher tariffs are, the less trade, or in this case, less domestic commerce takes place.  Higher domestic tariffs on small business men and women, for example, reduce their cash flow while reducing their opportunities to engage in activities that produce an acceptable, after-tax return on their capital employed.  Less trade,  fewer jobs and a higher misery index are the result.

Bi-partisan support for the Chinese Trade Bill is another threat to the outlook. The bill would supposedly save U.S. jobs by raising the price of Chinese imports by 25% by either forcing the Chinese to raise the value of their currency relative to the dollar, or by imposing 25% tariffs on Chinese made goods.  The idea:  spread the misery of the lackluster U.S. economy to the Chinese.

The rhetoric in support of this policy appeals to our pro-American instincts, and general sense of solidarity with our fellow citizens.  But if implemented, such a plan would only drive the misery index higher still.

First, raising the price of Chinese goods is the equivalent of legislating a pay cut for every American who now has to pay more for many of the goods at his or her local store. Second, paying more for Chinese imports means we will have less money to spend on other goods and services, most of which are provided by American workers.  So, while a few jobs may be saved and the profits of favored U.S. corporations protected, thousands of jobs no doubt would be lost.

Nor can government create jobs by imposing new regulations on the economy. This truth is demonstrated by the price controls on debit card swipe fees mandated by the Durbin Amendment to the Dodd-Frank “financial reform” bill.  On October 1, these fees were cut to about 24 cents from 44 cents per transaction.

Faced with an estimated $6.6 billion reduction in revenue, banks are introducing monthly debit card fees of as much as $5 on those with smaller bank balances. Other banks are cutting expenses and employment. To offset the lower swipe fee revenue,International Bancshares Corporation (IBC) of Laredo, Texas, for example, will close 55 of its smaller branches located in grocery stores and eliminate 500 jobs. In effect, the Durbin amendment transfers income from middle and low-income individuals to merchants, who now pay lower fees, or leads to higher unemployment.

Misery may love company.  But policies that spread the misery are not the answer.  The true polar star for moving forward is increasing the liberty of the American people.

Reduce the barriers to the expansion of private business.  Acknowledge and reward success through private initiative.  Condemn riches gained through political connections and government largess.  Reduce the scale, scope and burden of government.  Trust  in the ability of individuals living within communities to manage their lives, pursue happiness and create a better future for themselves and their families.

Full Disclosure:  I am a member of Herman Cain’s team of economic advisors.